COMMENTS OF THE
GENERAL SERVICES ADMINISTRATION

EMILY C. HEWITT
General Counsel

VINCENT L. CRIVELLA
Associate General Counsel
Personal Property Division

MICHAEL J. ETTNER
Senior Assistant General Counsel
Personal Property Division

Economic Consultant:

Snavely King Majoros O'Connor
& Lee, Inc. GENERAL SERVICES ADMINISTRATION
1220 L Street, N.W. 18th & F Streets, N.W., Room 4002
Washington, D.C. 20005 Washington, D.C. 20405

April 12, 1996

Table of Contents

Page

Summary i

I. Introduction 1

II. Goals and Principles 2

III. Overview of GSA Universal Service Recommendations 4

IV. Universal Service Line Rates 6

A. Definition of Universal Service Line Services 6

B. Definition of Study Area 8

C. Definition of Universal Service Line Rate 10

D. Restrictions on Rural Universal Service Line Rates 10

V. Interstate Universal Service Support 12

A. Residential Subscriber Line Charge 12

B. Interstate Universal Service Fund 13

C. Proxy Methodologies 14

D. Competitive Bidding 15

VI. Intrastate Universal Service Support 16

VII. Conclusion 17

Summary

In these Comments, GSA proposes a competitively neutral universal service plan that will satisfy the requirements of the 1996 Act without seriously eroding economic efficiency in the telecommunications market.

Under GSA's universal service plan, the Commission would establish minimum and maximum universal service line ("USL") rates for rural residential subscribers to ensure that their rates are reasonably comparable to urban residential rates.

Under GSA's universal service plan, interstate common line costs for business and urban residential subscribers would be fully recovered through flat-rated Subscriber Line Charges ("SLCs"). Interstate common line costs for rural residential subscribers would be explicitly subsidized by an interstate Universal Service Fund ("USF"). All interstate carriers would be required to contribute to the interstate USF in proportion to their share of total interstate revenues net of interstate payments to other carriers.

Finally, under GSA's universal service plan, state commissions would be encouraged to establish intrastate SLCs and USFs similar to those established by the Commission, but based upon intrastate revenues and costs.

BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554

________________________________________

				)
In the Matter of		)
				)
Federal-State Joint Board on 	)	CC Docket No. 96-45
Universal Service		) 
				)
                                )

COMMENTS OF THE
GENERAL SERVICES ADMINISTRATION

The General Services Administration ("GSA"), on behalf of the Federal Executive Agencies, submits these Comments in response to the Commission's Notice of Proposed Rulemaking ("NPRM"), FCC 96-45, released March 8, 1996. In this NPRM, the Commission requested comments and replies on the implementation, in part, of the Congressional directives set out in Section 254 of the Communications Act of 1934, as added by the Telecommunications Act of 1996 ("1996 Act").[1]

I. Introduction

Pursuant to Section 111(a) of the Federal Property and Administrative Services Act of 1949, as amended, 40 U.S.C. 759 (a)(1), GSA is vested with the responsibility to coordinate and provide for the procurement of telecommunications services for Federal agencies. That Act also allows GSA to delegate responsibility for the procurement of services to individual agencies when there are good reasons for such delegation.[2]

GSA is thus directly or indirectly one of the largest users of telecommunications services in the nation. As a large user of telecommunications services, GSA has consistently supported the Commission's efforts to promote economic efficiency through the introduction of competition in all telecommunications markets and the use of incentive regulation in those markets not yet effectively competitive.

Because cross-subsidies are intrinsically antithetical to economic efficiency, GSA recommends that the Commission make every effort to minimize the adverse effects of the universal service subsidy required by the 1996 Act. In these Comments, GSA recommends a plan that it believes will satisfy the requirements of the 1996 Act without seriously eroding economic efficiency in the telecommunications market.

II. Goals and Principles.

The 1996 Act lists seven specific principles for the preservation and advancement of universal service.[3] The Commission must abide by these principles fully and explicitly, and GSA will refer to them throughout these Comments as appropriate.[4] Principle (7) states:

(7) ADDITIONAL PRINCIPLES. -- Such other principles as the Joint Board and the Commission determine are necessary and appropriate for the protection of the public interest, convenience, and necessity and are consistent with this Act.[5]

The Commission seeks comment on what additional principles should guide them in their implementation of Section 254 of the 1996 Act.[6]

The Commission notes that a fundamental principle of the 1996 Act is the Congressional desire to provide for a pro-competitive, deregulatory national policy framework designed to accelerate rapidly the private sector deployment of advanced telecommunications and information technologies to all Americans.[7] In that context the Commission seeks comment on whether it should ensure that the means of distributing universal service support should be competitively neutral, and the least regulatory possible, consistent with its statutory obligations.[8] GSA believes that the Commission should consider competitive neutrality and the minimization of regulatory burden as guiding principles in its efforts.

GSA also believes that the Commission should consider the furtherance of economic efficiency as a fundamental principle in its universal service implementation efforts. GSA recommends that the Commission explicitly recognize two general requirements of economically efficient rates. First, to the extent possible, the rates for services should reflect their underlying costs. Jurisdictionally, for example, interstate rates should reflect interstate costs, and intrastate rates should reflect intrastate costs. Second, to the extent possible, non-traffic sensitive costs should be recovered through flat, not usage sensitive, rates.

The Commission specifically invites comments on "whether the existing method for recovery of common line costs allocated to the interstate jurisdiction comports with economic efficiency and the specific mandates of the 1996 Act.[9] As will be explained later in these Comments, economic efficiency and the 1996 Act dictate a change in the existing method for recovery of common line costs.

III. Overview of GSA Universal

Service Recommendations.

In order to put GSA's specific comments on various issues raised in the NPRM in context, it would be useful to provide an overview of GSA's recommended universal service plan. The details of each element in GSA's plan will be discussed in subsequent sections of these Comments.

Basic to an understanding of GSA's universal service plan is the recognition that the 1996 Act effectively requires the establishment of separate Federal and State universal service funds ("USFs"). The 1996 Act requires every telecommunications carrier that provides interstate telecommunications services to contribute to "mechanisms established by the Commission to preserve and advance universal service."[10] It also permits States to adopt regulations that would require "every telecommunications carrier that provides intrastate telecommunications services" to contribute "in a manner determined by the State."[11]

A second basis tenet of GSA's universal service plan is the recognition that the 1996 Act effectively requires the separate identification of urban and rural areas in each region of the Nation. The 1996 Act requires that consumers in "all regions of the Nation," including consumers in "rural, insular, and high cost areas," have services that are "reasonably comparable" to services provided in urban areas and that are available at rates that are "reasonably comparable" to rates charged for similar service in urban areas."[12]

GSA's universal service plan fully and explicitly achieves these mandates. Under GSA's plan, each universal service line ("USL") provider will be required to identify each of its study areas as either urban or rural. Based upon its analysis of the urban USL rates in each region, the Commission will specify the minimum and maximum rural USL rates allowable as "reasonably comparable" to those in the region's urban areas.

Under GSA's universal service plan, the Commission will establish an interstate Subscriber Line Charge ("SLC") as one component of the USL rate. The interstate SLC will be set at the average monthly interstate common line cost in urban areas, and all residential subscribers (except those eligible for Lifeline subsidies) of all USL providers will be charged this amount.[13]

Coincident with the implementation of this interstate residential SLC, the Commission will establish an interstate USF. All USL providers will be eligible to receive distributions from this USF if their interstate residential common line costs exceed their interstate residential SLC revenues. All interstate carriers will be required to contribute, as necessary, to the interstate USF based upon their proportionate share of all interstate revenues net of interstate payments to other carriers.

State commissions will be encouraged to establish intrastate USFs, either individually or collectively. These programs may be identical to the Federal program in concept, but based upon intrastate USL revenues and costs.

IV. Universal Service Line Rates.

A. Definition of Universal Service Line Services

In establishing the definition of USL services, Section 254(c)(1) of the 1996 Act requires the Commission to consider the extent to which such telecommunications services:

1. are essential to education, public health, or public safety:

2. have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers;

3. are being deployed in public telecommunications networks by telecommunications carriers; and

4. are consistent with the public interest, convenience, and necessity.

GSA commends the Commission for its identification of those services which are consistent with all four of these considerations. The services identified by the Commission[14] are:

1. Voice grade access to the public switched network, with the ability to place and receive calls;

2. Touch-tone;

3. Single party service;

4. Access to emergency service (911); and

5. Access to operator services.

The one service GSA would recommend adding to this list involves access to interexchange services. As the Commission notes, such access is specifically referenced in Section 254 (b)(3), and would thus appear to be appropriate.[15] Interstate access should be available to, but not required of, a USL subscriber. As the Commission notes, toll blocking allows subscribers a measure of control over their telephone bill. As GSA demonstrated in the Commission's Subscribership proceeding, toll blocking can provide an important contribution to the preservation and enhancement of universal services.[16] The Commission should, therefore, add availability or blocking of interexchange access as a core USL service.

B. Definition of Study Area

As noted above, the 1996 Act effectively requires the identification of all study areas as either rural or urban. To be consistent with Section 3(a)(47)(A) of the 1996 Act, containing a definition of "rural telephone company," the Commission should define a rural study area as one that does not include either:

1. any incorporated place of 10,000 inhabitants or more, or any part thereof, based on the most recently available population statistics of the Bureau of the Census; or

2. Any territory, incorporated or unincorporated, included in an urbanized area, as defined by the Bureau of the Census as of August 10, 1993.

As long as each study area is identified as either urban or rural, carriers should be permitted to disaggregate their service areas into study areas as large as a state or as small as a wire center. As GSA explained in its comments in the Commission's Universal Service proceeding, this flexibility in study area definition is both economically efficient and competitively neutral.[17] The 1996 Act specifically requires universal service support to be explicit,[18] and large carriers must be provided study area flexibility to avoid the current system of implicit subsidies.

Study areas should be no smaller than wire centers, however. In the Universal Service proceeding, the Commission suggested that disaggregation could be carried to the Census Block Group ("CBG") level, which consists of about 400 households.[19] The Southwestern Bell Telephone Company ("Southwestern") explained why study areas should be no smaller than wire centers as follows:

Census Block Groups are inappropriate for use in disaggregating study area costs. Inherent inaccuracies abound with the use of CBGs. The cost of providing telephone service is dependant upon the physical design and installation of the telephone plant. Telephone wire centers have become the standard telephone service area. Wire center boundaries have evolved to reflect the specific characteristics of telephone plant required to serve a particular area. Loop length limitations to meet transmission standards, population density, geographic obstacles, and other factors have influenced the boundaries of current wire centers. The geographic areas associated with CBGs do not match telephone company serving areas. CBGs bear no direct relationship with how telephone plant is designed or installed.[20]

The specification of a study area smaller than a wire center would represent an example of extreme regulatory overkill.

C. Definition of Universal Service Line Rate

The Commission should define a USL rate as the composite of the lowest generally available rates to a residential subscriber for all USL services. In general, a USL rate is the sum of the following rates:

1. The interstate residential SLC;

2. The monthly residential local service rate;

3. Any intrastate residential SLC; and

4. Any intrastate residential surcharge (including touch-tone, 911, etc.).

D. Restrictions on Rural Universal Service Line Rates

As discussed above, the 1996 Act requires that rural USL rates be "reasonably comparable" to urban USL rates in each region of the Nation. GSA recommends that the Commission ensure compliance with this requirement by establishing minimum and maximum USL rates for rural areas.[21]

To begin with, the Commission will have to define the "regions of the Nation." GSA recommends that the Commission define these regions in conformity with the Regional Bell Operating Company ("RBOC") territories. The operations of independent USL providers would be identified according to these regions. The Southern New England Telephone Company's Connecticut operations, for example, would be identified as part of the "NYNEX" region.

Next, the Commission should require all USL providers in each RBOC region to provide a table showing the USL rates charged to their residential customers in each urban study area, and the number of residential customers charged each rate. Based upon these submissions, the Commission should establish a minimum rural USL rate and a maximum rural USL rate for each region. To avoid distortions caused by outliers, the minimum rural USL rate should be the average USL rate paid by the 10 percent of urban residential customers in each region having the lowest USL rates. The maximum rural USL rate should be the average USL rate paid by the 10 percent of urban residential customers in each region having the highest USL rates. No provider will be permitted to establish a generally available USL rate in any rural study area that is either less than the minimum rural USL rate for its region or more than the maximum rural USL rate. V. Interstate Universal Service Support.

A. Residential Subscriber Line Charge

The first step in the design of the Commission's interstate universal service support system is the determination of the interstate residential SLC. Under GSA's universal service plan, the residential SLC would be the average monthly interstate common line cost in uban areas.

To deterimine the interstate residential SLC, the Commisison should require all USL providers to submit their unseparated loop costs and number of working loops by study area pursuant to Sections 36.621 and 36.622 of the Commission's rules. The interstate residential SLC would be one-twelth of 25 percent of the national average annual urban unseparated loop cost. In 1993 the national average annual total unseparated loop cost was $245.95.[22] Assuming that average urban loop costs are less than average rural loop costs, the interstate residential SLC would thus be less than $5.06 per month.

By basing the interstate residential SLC on urban loop costs, the Commission will be contributing to the maintenance of an affordable overall USL rate in a manner which will minimize distortion of the urban market where competition can be expected to develop more rapidly.B. Interstate Universal Service Fund

The key to the Commission's support of universal service is the establishment of an interstate USF. GSA recommends that the Commission implement the interstate USF in an economically efficient and competitively neutral manner.

Under GSA's universal service plan, a USL provider would be eligible to withdraw 90 percent of its interstate residential costs per loop for study areas that are between 115 and 150 percent of the interstate residential SLC, and 100 percent of its interstate residential costs per loop in excess of 150 percent. This sliding scale is consistent with Section 36.631 of the Commission's rules. Conversely, if a USL provider's interstate residential costs per loop for a study area are less than 85 percent of the interstate residential SLC, the provider would be required to contribute 90 percent of the amount below 85 percent to the interstate USF. In order to ensure that USL providers are always provided an incentive to reduce their loop costs, no provider would be required to make a 100 percent contribution, no matter how low its actual costs.

Under GSA's universal service plan, the interstate business SLC would be billed by each carrier at a level designed to recover all interstate business loop costs. Conceptually, therefore, all urban interstate loop costs will be recovered through interstate SLCs in an economically efficient manner.

Rural interstate residential SLC revenues, however, will not recover all rural interstate residential loop costs, and this will require additional interstate USF contributions. GSA also recommends that interstate SLC discounts offered in connection with the provision of Lifeline services be recovered from the interstate USF.

GSA recommends that the interstate USF shortfall be recovered by contributions from all interstate carriers based upon their proportional share of all interstate revenues net of interstate payments to other carriers. This mechanism will satisfy the requirements of Section 254(d) of the 1996 Act in a competitively neutral manner with a minimum of regulatory burden and loss of economic efficiency.

C. Proxy Methodologies

The Commission requests comments on the use of proxy methodologies, instead of recorded costs, to determine universal service support.[23] GSA opposes the use of proxy methodologies.

In its comments in the Commission's Universal Service proceeding, GSA explained that a proxy method simply will not work.[24] No set of proxy factors can adequately predict the costs necessary to serve specific areas. Inevitably, some high-cost areas would not be served because the proxy factors indicate that no subsidy is warranted, even though carriers find them too costly to serve. Conversely, subsidies would be doled out to areas which are not costly to serve simply because the proxy factors mistakenly indicate they should be subsidized. The industry and the Commission should devote their efforts and resources to the efficient implementation of the 1996 Act and not the search for the "Holy Grail" of cost algorithms.

D. Competitive Bidding

The 1996 Act specifies the eligibility requirements that carriers must satisfy in order to receive universal service support. Under Section 214(e), support is available only to "common carrier[s]" designated as "eligible telcommunications carrier[s]" by the appropriate State commissions.[25] The Commission solicits comment on whether relying on a competitive bidding process to set the level of subsidies required in rural, insular, and high-cost areas would be consistent with Section 214(e).[26] Carriers offering all of the services supported by universal service mechanisms would bid on the level of assistance per line that they would need to provide all supported services. Although the low bidder would determine the amount of support per line served that eligible carriers would receive, any authorized carrier would be able to receive assistance at that level.[27] The low bidder, however, would receive an additional "incentive bonus." The bonus would be necessary to induce competitors to underbid one another, rather than merely accepting the established level of assistance.

In its comments in the Commission's Universal Service proceeding, GSA supported the concept of competitive bidding, but recommended that the Commission defer to the state commissions for its implementation.[28] In view of the specific responsibilities delegated to the state commisisons under Section 214(e), as described above, GSA recommends that the Commission encourage the state commissions to consider competitive bidding in the design of their intrastate universal service plans, but that it refrain from writing specific rules implementing that approach.

VI. Intrastate Universal Service Support.

As noted above, the 1996 Act permits state commissions to adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service.[29] GSA recommends that the state commissions consider the adoption of intrastate SLCs and USFs in a manner similar to that described above, but based upon intrastate USL revenues and costs.

VII. Conclusion

As the agency vested with the responsibility for acquiring telecommunications services on a competitive basis for use of the Federal Executive Agencies, GSA urges the Commission to implement the Congressional directive set forth in Section 254 of the 1996 Act in the manner described in these Comments.

Respectfully submitted,

EMILY C. HEWITT

General Counsel

VINCENT L. CRIVELLA

Associate General Counsel

Personal Property Division

MICHAEL J. ETTNER

Senior Assistant General Counsel

Personal Property Division

GENERAL SERVICES ADMINISTRATION

18th & F Streets, N.W., Rm. 4002

Washington, D.C. 20405

(202) 501-1156

April 12, 1996CERTIFICATE OF SERVICE

I , do hereby certify that copies of the foregoing "Comments of the General Services Administration" were served this 12th day of April,1996, by hand delivery or postage paid to the following parties:

[Service list deleted from online version.]

[2] 40 U.S.C. 759 (b)(3).

[3] 1996 Act, [[section]]254(b).

[4] GSA will not address Principle (6), "Access to Advanced Telecommunications Services for Schools, Health Care, and Libraries" in these Comments.

[5] 1996 Act, [[section]]254(b).

[6] NPRM, para. 8.

[7] Id.

[8] Id.

[9] Id., para. 114.

[10] 1996 Act, [[section]]254(d).

[11] Id., [[section]]254(f) (emphasis added).

[12] Id., [[section]]254(b)(3).

[13] The interstate business SLC will be billed by each carrier at a level designed to recover business common line costs.

[14] NPRM, para. 16.

[15] Id., para. 23.

[16] Amendment of the Commission's Rules and Policies to Increase Subscribership and Usage of the Public Switched Network, CC Docket No. 95-115 ("Subscribership" proceeding), Comments of GSA, September 27, 1995, pp. 2-4; Reply Comments of GSA, November 13, 1995, pp. 4-7.

[17] Amendment of Part 36 of the Commission's Rules And Establishment of a Joint Board, CC Docket No. 80-286 ("Universal Service" proceeding), Comments of GSA, September 12, 1995, pp. 6-7; Reply Comments of GSA, November 9, 1995, pp. 8-10.

[18] 1996 Act, [[section]] 254(e).

[19] Id., Notice of Proposed Rulemaking, FCC 95-282, released July 13, 1995, para. 56.

[20] Id., Comments of Southwestern, September 12, 1995, Attachment 1, p. 34 (emphasis added).

[21] These limits would also apply to "insular" areas.

[22] Monitoring Report, CC Docket No. 87-339, May, 1995, Table 3.9, Industry Total.

[23] NPRM, para. 31-34.

[24] Universal Service proceeding, Comments of GSA, September 12, 1995, pp. 9-11; Reply Comments of GSA, November 9, 1995, pp. 10-11.

[25] 1996 Act, [[section]]102(a), [[section]]214(e).

[26] NPRM, para. 35.

[27] Id., para. 36.

[28] Universal Service proceeding, Comments of GSA, September 12, 1995, p. 12; Reply Comments of GSA, November 9, 1995, p. 13.